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Gap Insurance News...
 

Posted 7/6/2003 6:23 PM     Updated 7/6/2003 9:27 PM

Car buyers burned by negative equity

By David Kiley, USA TODAY
DETROIT — A large number of auto buyers owe more on their trade-ins than the vehicles are worth, making it tough for dealers, and expensive for buyers, to finance new purchases.

Edmunds.com, an auto shopping service, reports that 40% of new-car buyers are "upside down" with an average negative equity of $2,200. J.D. Power and Associates says negative equity for an average buyer has about doubled since 2000 to $1,200.

It's a growing phenomenon because big discounts on new cars have the effect of depressing the value of used cars, and five- and six-year loans means it takes longer for car owners to achieve positive equity in a new vehicle.

"Every extra dollar (of discounts) we put on a Dodge Durango comes off the trade-in value of a used Durango," says Chrysler Financial spokesman James Ryan.

Mark Eddins of Friendly Chevrolet in Dallas estimates that 90% of his customers are upside-down, often owing $10,000 to $15,000 more than the trade-in is worth. "It's an awful thing for our business," says Eddins. It's a bigger problem for customers of automakers who do the most discounting and attract the longest term loans — General Motors, Ford, Chrysler, Mitsubishi, Hyundai, Suzuki. Many Toyota and Honda dealers report only about 15% of their customers are upside down.

In-the-hole buyers usually add the amount they owe on their trade-in onto the loan for the new car. And they often stretch out the loan to keep monthly payments low. The longer the loan, the longer it takes to owe less than the vehicle's depreciating value.

The Consumer Banker's Association reports 82% of new vehicle loans last year were longer than four years; 31% were longer than five. In California, some dealers are writing seven-year loans.

The problem has spawned a new profit center for some dealers, who are promoting gap insurance. Gap pays the difference between what's owed and what regular insurance will cover if a vehicle is totaled in a wreck or stolen — usually up to 130% of the vehicle's value

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From the Cincinnati Enquirer Sunday, May 05, 2002

Closing the gap on car insurance

Extra protection gets more popular
 

 By Jenny Callison
Enquirer contributor

        Suppose you've just bought or leased a new car, and you're involved in an accident in which your new vehicle is totaled. No problem, you say. You have insurance. Unfortunately, your auto insurance may be inadequate against this kind of loss.

        An insurance company's determination of your car's cash value may be a few thousand dollars less than the amount you still owe on your car loan. If you're leasing, you will owe all your remaining payments plus the residual value of the vehicle.

        That's why many experts recommend purchasing gap insurance.

        Gap insurance pays the difference between what your insurer reimburses you for your totaled car and what you owe. It's becoming increasingly popular as lenders require less from buyers and in some cases finance more than the purchase price of a new vehicle.

        “If somebody takes a long-term lease, more than the car's worth, gap insurance makes up the difference between what the car's worth versus what the debt is to the leasing company,” explained Oxford independent insurance agent Tom Fey. “We do write gap insurance for leases, but what we're finding out more and more is that more leasing companies include it with their lease.”

        While a few major auto insurers such as State Farm, Geico and Nationwide have stopped writing these gap endorsements, a number of independent agents do.

        “Unless somebody indicates that they have gap insurance, typically we suggest they add it,” said Stephen P. Mueller of Camargo Insurance in Madeira. “Some lenders do include gap coverage with the loan. It's a very good thing for the client.”

        When you drive your shiny car off the lot, depreciation has already set in, plus you're out the one-time fees you paid at purchase.

        According to Insure.com, an industry web site, car manufacturers calculate that a car loses between 10 and 15 percent of its value within the first year. If you've paid $18,000 for your new vehicle, that means it's soon worth only $15,300 to $16,200. Add to the value-price gap that extra $1000 or so you paid in one-time fees at purchase.

        Even so, gap insurance isn't needed in all situations. If you are purchasing a new car and have made a substantial down payment, and if you plan to pay off the loan within two or three years, your loan balance isn't necessarily out of whack with the vehicle's value. And some cars hold their value better than others.

        There are other factors to consider when deciding to purchase gap insurance, said Biff Arnold, finance manager for Jake Sweeney Chevrolet-Imports in Tri-County.

        “Look at how you use your car,” he advised. “Some people, like salesmen, put 30,000 miles a year on it. That's going to affect the depreciation.”

        Because a lessee's financial vulnerability is often greater than a purchaser's, more automobile finance institutions are including gap coverage in their standard leasing contracts. Mr. Arnold said that GMAC includes it with all lease contracts, but that such coverage is optional for new car purchases.

        Ralph Sells, sales and leasing manager for Performance Lexus in Deerfield Township, cautions buyers to check the provisions in gap coverage, since it can differ from one provider to another. Like GMAC, Lexus leases offer to include the coverage but purchasers who want it are encouraged to check with banks or insurance agents.

        Car dealers, insurance agents and lenders have seen a distinct increase in demand for gap insurance over the last several years. As some insurance providers have backed away from the product, more dealers and lenders have stepped forward.

        “We have offered it only within the last year, and demand has increased as more people have become aware that it exists,” said Beth Hinkle, loan officer with Sharefax Credit Union.

        Costs of gap insurance vary, as do provisions. Some policies will pay only a percentage of the “gap” they are filling; others are lavish in their reimbursements. Policies may be payable monthly, semi-annually or annually. Some lenders, like Sharefax, charge a one-time fee that covers the term of the loan or lease.

        In addition to understanding the provisions of his gap policy, a purchaser should consider dropping it when his vehicle's depreciation has leveled off and its value is roughly equal to what is still owed.


                              GAP coverage desirable for long-term car loans

By PAMELA YIP
The Dallas Morning News Wednesday, October 13, 2004

Guaranteed Auto Protection insurance typically is purchased for a one-time premium when you buy your vehicle, or it may be rolled into the amount of your loan. It will cost you anywhere from $100 to 4 percent or 5 percent of the vehicle's sticker price, said Jose Montemayor, Texas insurance commissioner.

You buy such insurance because you want to avoid a situation in which you are still paying off your car, even though the car is gone - either totaled or stolen.

With today's long-in-the-tooth loan terms, GAP insurance may become a more integral part of a financing package.

At one point, the standard auto loan term was 24 months.

"Now we have 60- to 72-month terms," said Bill Wolters, president of the Texas Automobile Dealers Association.

If you lease your vehicle, depending on how the lease is structured, GAP insurance is even more critical because the "residual value" - the leasing company's prediction of what the car will be worth at the end of the lease - may not be in line with the actual market value of the vehicle.

What is more, a lease assumes a low or no down payment, and consumers wanting to lease often have no trade-in.

In a lease, if your car is totaled, you owe the difference between what you have paid and what you owe on the balance of the lease.

Many leasing companies require the GAP coverage to protect the financial interest of the lessor, said Paul Taylor, chief economist of the National Automobile Dealers Association.

If you have GAP insurance and your car is totaled or stolen, follow the requirements set by your insurance company.

"Some companies require you to continue making loan payments on your totaled car until the money from the GAP insurance is paid out," according to Edmunds.com.














 
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